Economy and Environment and Government and Real Estate & Retail and Small Business

VOICES FROM THE INDUSTRY: Benefits to buying or leasing in a troubled economy

October 27, 2008

As real estate professionals well know, a troubled economy is making it harder to negotiate and close deals. However, buying or leasing real estate in a troubled economy also provides great opportunities for buyers and tenants.

Real estate brokers often talk about it being a buyer's and renter's market and focus on selection and price; however, there are several other benefits when buying or leasing commercial real estate in a troubled economy. These additional benefits include tax abatements or credits and favorable purchase and lease terms.

Tax abatements and credits

Property tax abatements provide significant reductions in a business's property taxes for as many as 10 years. Abatements may be available when property is located in an Economic Revitalization Area, or ERA. To be designated an ERA, the area must suffer from "lack of development, cessation of growth, deterioration of improvements or character of occupancy, age, obsolescence, substandard buildings, or other factors which have impaired values or prevent a normal development of property or use of property."

The potential tax abatements for property purchased or leased in ERAs include abatements for rehabilitating or redeveloping real property improvements (i.e., buildings), new and used business equipment, and commercial and industrial buildings vacant for more than one year. The same governmental body that determines whether an area is designated as an ERA also determines whether and how much of an abatement is given for the particular property within the ERA. ERAs and abatements often increase with a troubled economy.

A business may also obtain a tax reduction by purchasing and then redeveloping property in a Community Revitalization and Enhancement District, or CRED.

The CRED district in Indianapolis is located at the Lafayette Square area. A business meeting the criteria for CRED district benefits may obtain a tax credit equal to 25 percent of the qualified business investment in the redevelopment. Moreover, the CRED designation allows the city to capture the district's revenue and income taxes to be used to promote the district's revitalization.

Depending on your business's circumstances, when determining whether to purchase or lease property, it is worth considering established ERAs, potential ERAs, and CRED districts. In negotiating the purchase agreement or lease, one can include a condition providing that the buyer or the tenant be released from the transaction upon the government rejecting the ERA designation, tax abatement, or tax credit.

Purchase agreement terms

Buyers should aggressively negotiate purchase agreement terms in the current market. First, in most cases, the seller should pay for the title policy. In this market, seller also should bear the cost of the survey and environmental study.

Second, the earnest money amount should be minimal and refundable up to the date of closing. Third, the due-diligence periods should be much longer. At a minimum, buyers should get a free look for 180 days. Fourth, sellers should give broader representations and warranties regarding the condition of the property.

Lease terms

Now is the time for smaller tenants to demand anchor-tenant-type provisions. First, demand co-tenancy provisions permitting the tenant to terminate the lease or obtain rent reduction in the event an anchor tenant leaves. The tenant should demand similar rights if the occupancy rate drops below a certain level.

Second, the lease should also contain more flexible use, assignment or subletting provisions and, if restricted by landlord's consent, consent should not be unreasonably withheld, restricted or delayed. Third, if desired, the tenant should demand an exclusive clause prohibiting the landlord from renting space in the center to businesses that sell similar products or services.

Fourth, tenants can aggressively negotiate for a short-term lease (one- to twoyears) with options allowing the tenant to extend the term if desired. However, established businesses may want to lock in a lower lease rate for a longer term.

Small businesses may be reluctant to expand by buying or leasing property in the current economy. However, there are potential benefits. Able businesses should take advantage of these benefits because they likely will not be around for long.

Berlin is an attorney at Taft Stettinius & Hollister LLP, focusing his practice on real estate matters. Views expressed here are the writer's.
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